Accounts Payable Turnover Ratio Calculator
Answers the Question
How easily can we pay off our vendors?
Calculator for Accounts Payable Turnover Ratio
What Is the Accounts Payable Turnover Ratio?
This formula is used to analyze how quickly a firm is able to address its accounts payable. Fundamentally, it's a measure of company liquidity, though it's imperfect metric as many firms choose to pay their bills later than they could.
It's often used by vendors and potential creditors in order to understand the risk of providing goods or loans without prepayment.
Why Is it Important?
- The higher the accounts payable turnover, the more quickly a firm pays its bills. This means that vendors will likely have to wait less time before getting paid.
Formula(s) to Calculate Accounts Payable Turnover Ratio
- ACCOUNTS PAYABLE TURNOVER RATIO = TOTAL PURCHASES / AVERAGE ACCOUNTS PAYABLE
- Assuming that past behavior is a reliable indicator of future results.
- Not realizing that many companies, especially those that are improving cash flow by selling off fixed assets, may only be able to keep paying their suppliers for a limited time.
- Assuming that norms for accounts payable turnover are equal across different sectors.
- Believing that all vendors are paid within the same time frame. Contracts can be written to shorten or lengthen payment dates. Firms with strong pricing power are in a good position to negotiate.
- Not considering seasonality. Many firms will be better able to pay at certain times of the year.
- Believing that a quick turnover is unambiguously good. The faster turnover is completed, the less money it will have available to invest in other areas.